When is sales tax due on your DME-related sales and services? The North Carolina Business Court Weighs In.

Sales tax compliance may not be the reason you are in business, but consequences can be very serious if you fail to collect and remit sales taxes on a taxable transaction. Durable medical equipment suppliers (DME) should take note of a recent decision by the North Carolina Business Court in which the DME supplier (at least according to the Court) erroneously thought that certain DME sales were exempt from use tax.

The Department of Revenue, however, issued a tax assessment for sales of supplies used in sleep study testing in connection with a diagnostic sleep system machine. The sleep studies were covered by Medicare or Medicaid and were not part of the tax assessment. It was the supplies used with the sleep studies, such as cleaner, sensors, gauze tape, Q-Tips, and the like, that the Department took issue with because the physicians’ prescriptions did not specifically mention the supplies as having been prescribed, only the sleep studies!

Feeling Great’s problem was that the prescriptions did not specifically refer to “supplies” associated with the sleep studies. Instead, the physician only “prescribed sleep study testing for the patient.” Had the prescription included “all supplies as needed” in the description, the court implied that the result would have been different: sales of such supplies would have been “on prescription” and therefore exempt from sales tax.

Feeling Great’s many arguments to the contrary, including that “Medicaid routinely authorizes the purchase of durable medical equipment and associated ‘supplies’ under a single prescription” (which the administrative law judge had found), were not accepted by the Business Court.

It may seem odd to distinguish between a prescription that prescribes sleep study testing and a prescription that prescribes sleep study testing as well as needed supplies for the machine, but it is the distinction that caused a significant sales tax assessment for the taxpayer in this case. DME suppliers should carefully review the prescriptions and be mindful of the Department’s position when collecting sales and use tax.

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Knicole C. Emanuel

Knicole C. Emanuel is an attorney at Potomac Law Group in Raleigh, NC where she concentrates on Medicare and Medicaid regulatory compliance litigation. See legal disclaimer @ "About Knicole."
Follow her on Twitter at @medicaidlawnc.